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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to______________
Commission file number 0-17690
Krupp Insured Mortgage Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3021395
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 523-0066
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Depositary
Receipts representing Units of Limited Partner Interests.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /.
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes / / No /X/
Aggregate market value of voting securities held by non-affiliates: Not
applicable.
Documents incorporated by reference: See Item 15
The exhibit index is located on pages 11-12.
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
ITEM 1. BUSINESS
Krupp Insured Mortgage Limited Partnership (the "Partnership") is a
Massachusetts limited partnership which was formed on March 21, 1988. The
Partnership raised approximately $299 million through a public offering of
limited partner interests evidenced by units of depositary receipts ("Units"),
and used the proceeds available for investment primarily to acquire
participating insured mortgages ("PIMs") and mortgage-backed securities ("MBS").
The Partnership considers itself to be engaged only in the industry segment of
investment in mortgages.
The Partnership's investments in PIMs on multi-family residential properties
consist of a MBS or an insured mortgage loan (collectively, the "insured
mortgage") guaranteed or insured as to principal and basic interest. These
insured mortgages were issued or originated under or in connection with the
housing programs of the Government National Mortgage Association ("GNMA") or the
Department of Housing and Urban Development ("HUD"). PIMs provide the
Partnership with monthly payments of principal and basic interest and also may
provide the Partnership with participation in the current revenue stream and in
residual value, if any, from the sale or other realization of the underlying
property (participation interest). The borrower conveys these rights to the
Partnership through a subordinated promissory note and mortgage. The
participation features are neither insured nor guaranteed.
The Partnership also has investments in MBS collateralized by single-family and
multi-family mortgage loans issued or originated by Fannie Mae, GNMA or the
Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae, GNMA and FHLMC
guarantee the principal and basic interest of the Partnership's Fannie Mae, GNMA
and FHLMC MBS, respectively.
Proceeds received from prepayments or other realizations of mortgage assets will
be distributed by the Partnership to investors through quarterly or special
distributions.
Although the Partnership will terminate no later than December 31, 2028, the
value of the PIMs may be realized by the Partnership through repayment or sale
as early as ten years from the dates of the closing of the permanent loans and
the Partnership may realize the value of all its other investments within that
time frame. Therefore, it is anticipated that dissolution of the Partnership
could occur significantly prior to December 31, 2028.
The Partnership's investments are not expected to be subject to seasonal
fluctuations. However, the future performance of the Partnership will depend
upon certain factors which cannot be predicted. In addition, any ultimate
realization of the participation features of the PIMs will be subject to similar
risks associated with equity real estate investments, including: reliance on the
owner's operating skills, ability to maintain occupancy levels, control
operating expenses, maintain the property and provide adequate insurance
coverage; adverse changes in general economic conditions, adverse local
conditions, and changes in governmental regulations, real estate zoning laws, or
tax laws; and other circumstances over which the Partnership may have little or
no control.
The Partnership anticipates there will be sufficient cash flow from the
mortgages to meet cash requirements. To the extent that the Partnership's cash
flow should be insufficient to meet the Partnership's operating expenses and
liabilities, it will be necessary for the Partnership to obtain additional funds
by liquidating its investment in one or more mortgages or by borrowing. The
Partnership may borrow money on an unsecured or secured basis to further the
purposes of the Partnership. The Partnership may pledge mortgages as security
for any permitted borrowing. The Partnership, under some circumstances, may
borrow funds from any general partner or an affiliate of any general partner.
However, the transaction must include interest rates and other finance charges
and fees not in excess of the amounts that are charged by unaffiliated lenders
for comparable loans and must satisfy other conditions specified in the
partnership agreement. The Partnership has not borrowed any funds during the
past and does not intend to do so in the future.
The FHA coinsurance loan program under Section 221(d)(4) of the National Housing
Act provides for loans with 40 year terms and Section 223(f) provides for loans
with 35 year terms. Both have a call option at any time after ten years, upon
one year's notice. The subordinated promissory notes and subordinated mortgages
that secure the participation feature of the PIMs provide for acceleration of
maturity at the earlier of the sale of the underlying property or the call date,
typically expected to be a date ten years after the date of the final
endorsement for mortgage insurance.
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From time to time, the Partnership expects that it may realize the principal and
participation in residual value, if any, of its mortgages before maturity. It is
expected that the mortgages will be repaid after a period of ownership of
approximately ten years from the dates of the closings of the permanent loans.
Realization of value of mortgages may, however, be made at an earlier or later
date.
The Partnership will not underwrite securities of other issuers, offer
securities in exchange for property, invest in securities of other issuers
for the purpose of exercising control or issue senior securities, and the
Partnership has not engaged in any of these activities during the past. The
Partnership has not repurchased or reacquired any of the partner interest
from partners or units from unit holders in the past and does not intend to
do so in the future. The Partnership may not make loans to any general
partner or any affiliate of any general partner and will not make loans to
any other persons, other than mortgage investments of the type described
above.
The requirements for compliance with federal, state and local regulations to
date have not had an adverse effect on the Partnership's operations, and the
Partnership does not presently anticipate any adverse effect in the future.
As of December 31, 2001 there were no personnel directly employed by the
Partnership.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Partnership is a
party or to which any of its securities is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There currently is no established trading market for the Units.
The number of investors holding Units as of December 31, 2001 was approximately
12,400. One of the objectives of the Partnership is to provide quarterly
distributions of cash flow generated by its investments in mortgages. The
Partnership presently anticipates that future operations will continue to
generate cash available for distribution.
During 2000, the Partnership made special distributions consisting of principal
proceeds, Shared Appreciation Interest and prepayment premiums from the
Brookside, Enclave, Bell Station, Salishan, Saratoga, and Marina Shores PIM
prepayments and the Patrician MBS prepayment.
The Partnership will make special distributions in the future as PIMs prepay or
if a sufficient amount of cash is available from MBS and PIM principal
collections.
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The Partnership made distributions to its Partners during the two years ended
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
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Amount Per Unit Amount Per Unit
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Quarterly Distributions:
Limited Partners $ 3,589,632 $ .24 $ 5,833,146 $ .39
General Partners 78,831 - 142,320 -
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3,668,463 5,975,466
Special Distributions:
Limited Partners - $ - 53,994,033 $ 3.61
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$ 3,668,463 $ 59,969,499
============== =============
</Table>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Partnership's financial position and operating results. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and
Supplementary Data, which are included in Items 7 and 8 (Appendix A) of this
report, respectively.
<Table>
<Caption>
Year Ended December 31,
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2001 2000 1999 1998 1997
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Total revenues $ 3,120,660 $ 4,690,857 $ 9,806,072 $ 11,954,179 $ 16,679,293
Net income 2,511,481 3,879,148 7,502,317 9,100,138 12,188,074
Net income allocated to Partners:
Limited Partners 2,436,137 3,762,774 7,277,247 8,827,134 11,822,432
Average per Unit .16 .25 .49 .59 .79
General Partners 75,344 116,374 225,070 273,004 365,642
Total assets at
December 31 41,946,276 42,790,650 98,726,491 135,213,294 161,358,290
Distributions to Partners:
Quarterly Distributions:
Limited Partners 3,589,632 5,833,146 12,563,709 13,909,819 17,948,156
Average per Unit .24 .39 .84 .93 1.20
General Partners 78,831 142,320 260,692 310,079 386,086
Special Distributions:
Limited Partners - 53,994,033 30,511,863 20,789,946 28,717,048
Average Per Unit - 3.61 2.04 1.39 1.92
</Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the Partnership's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These factors
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include, among other things, federal, state or local regulations; adverse
changes in general economic or local conditions; pre-payments of mortgages;
failure of borrowers to pay participation interests due to poor operating
results at properties underlying the mortgages; uninsured losses and potential
conflicts of interest between the Partnership and its Affiliates, including the
General Partners.
LIQUIDITY AND CAPITAL RESOURCES
The most significant demand on the Partnership's liquidity is the regular
quarterly distribution paid to investors of approximately $900,000. Funds used
for the investor distributions are generated from interest income received on
the PIMs, MBS, cash and short-term investments and the principal collections
received on the PIMs and MBS. The Partnership funds a portion of the quarterly
distribution from principal collections causing the capital resources of the
Partnership to continually decrease. As a result of the decrease, the total cash
inflows to the Partnership will also decrease, which will result in periodic
adjustments to the distributions paid to investors. The General Partners
periodically review the distribution rate to determine whether an adjustment is
necessary based on projected future cash flows. In general, the General Partners
try to set a distribution rate that provides for level quarterly distributions.
Based on current projections the General Partners have determined that the
Partnership will continue to pay a distribution of $.06 per Limited Partner
interest per quarter for the near future.
The General Partners have also determined that the Partnership will pay a
special distribution of $.10 per Limited Partner interest in the first quarter
of 2002 due to the prepayment of the single family MBS earlier than previously
anticipated.
In addition to providing insured or guaranteed monthly principal and basic
interest payments, the Partnership's PIM investments also may provide additional
income through its participation feature in the underlying properties if they
operate successfully. The Partnership may receive a share in any operating cash
flow that exceeds debt service obligations and capital needs or a share in any
appreciation in value when the properties are sold or refinanced. However, this
participation is neither guaranteed nor insured, and it is dependent upon
whether property operations or its terminal value meet certain criteria.
During May 2001, the Partnership received $19,231 from the borrowers of the
Richmond Park PIM as a settlement to release the loan's participation features.
The property was not generating sufficient cash flow to pay any participation
from property operations nor did it have sufficient appreciation in value to
meet the threshold to pay any participation based on value if the property was
sold or refinanced. Considering the property's physical condition, there was
little likelihood that its status would improve. Rental rate increases and
occupancy levels had been difficult to achieve. Consequently, all of the cash
flow generated by the property went back into operations. While the borrower had
assured that the insured first mortgage debt was serviced, no major capital
improvements were undertaken to enhance the property's leasing efforts.
Furthermore, routine maintenance and repairs were beginning to be prioritized
according to need and available cash. The condition of the property and its
inability to generate sufficient cash flow seriously impaired the ability of the
borrower to either sell the property or refinance it without taking a loss. The
borrower's business plan was to make a significant investment in the property to
correct deferred maintenance and functional obsolescence and to market it for
leasing in order to reposition the property for a successful sale or refinance.
The borrowers were unwilling to make the significant investments necessary while
the property was encumbered with the PIM's participation features. As a result,
the borrowers requested a release of the participation features while keeping
the insured first mortgage in place until operations improve and the property
can be sold or refinanced. The General Partners agreed to this request in return
for the settlement because there was no expectation that the Partnership would
be entitled to any participation proceeds now or in the future in the property's
physical condition. Upon this settlement, the insured first mortgage loan on
Richmond Park was reclassified from a PIM to a MBS as the only remaining portion
of the investment is a GNMA MBS. The Partnership also reclassified this
investment to available for sale concurrent with the release of the
participation feature. The Partnership will continue to receive the scheduled
principal and interest payments on the first mortgage until the property is
refinanced or sold.
On June 2, 2000, the Partnership paid a special distribution of $.93 per Limited
Partner interest from the Bell Station and Enclave PIM payoffs along with the
Shared Appreciation Interest proceeds from the Brookside PIM (see below). On
March 30, 2000, the Partnership received $190,239 of Shared Appreciation
Interest and $5,973 of Shared Income Interest from the Bell Station PIM. During
April, the Partnership received the principal proceeds of $4,901,863 from the
Bell Station PIM. During May, the Partnership received the principal proceeds of
$8,508,892 from the Enclave PIM. The underlying first mortgage loan matured on
May 1, 2000; however, the Borrower was unable to close on his refinancing of the
property in time to payoff the loan on its maturity date. Consequently, Fannie
Mae paid off the MBS under its guarantee obligation. Subsequent to the payoff of
the MBS portion of the PIM, the Partnership received $178,854 of Shared
Appreciation Interest and $200,398 of Shared Income Interest.
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On March 30, 2000, the Partnership paid a special distribution of $.31 per
Limited Partner interest from the principal proceeds in the amount of
$4,531,910, received from the Brookside Apartments PIM payoff in February of
2000. The underlying first mortgage loan matured on February 1, 2000; however,
the Borrower was unable to close on his refinancing of the property in time to
payoff the loan on its maturity date. Consequently, Fannie Mae paid off the MBS
under its guarantee obligation. Subsequent to the payoff of the MBS portion of
the PIM, the Partnership received $130,000 of Shared Appreciation Interest and
$176,513 of Shared Income Interest.
In addition to the payoffs mentioned above, the Partnership received Shared
Income Interest of $24,233 from the Enclave PIM during February 2000 and $34,793
from the Creekside PIM during June 2000.
On January 11, 2000, the Partnership paid a special distribution of $2.37 per
Limited Partner interest from the prepayment proceeds received during December
1999 from the Salishan, Saratoga and Marina Shores Apartments PIMs and the
Patrician MBS. In addition to the principal proceeds from the Salishan PIM of
$14,666,235, the Partnership received $146,662 of prepayment premium income and
$311,650 of Shared Income Interest and Minimum Additional Interest. The
Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM
along with $176,679 of Shared Appreciation Interest and prepayment premium
income. The principal proceeds from the Saratoga PIM and the Patrician MBS
prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did
not receive any participation interest on the Saratoga prepayment.
In October 1999, the Partnership received a prepayment of the Valley Manor
Apartments PIM of $4,425,993. The Partnership did not receive any Additional
Interest as a result of this prepayment because the underlying property's
appraised value did not exceed the threshold required to realize additional
interest. In November 1999 the Partnership paid a special distribution of $.30
per Limited Partner interest from the Valley Manor proceeds.
In February 1999, the Partnership received a payoff of the Pope Building PIM in
the amount of $3,176,761. In addition, the Partnership received $703,860 of
Shared Appreciation and prepayment premium income and $218,578 of Shared Income
and Minimum Additional Interest upon the payoff of the underlying mortgage.
During March 1999, the Partnership received a payoff of the Remington PIM in the
amount of $12,199,298. The payoff was the result of a default on the underlying
loan which resulted in the Partnership receiving all of the outstanding
principal balance under the insurance feature of the PIM. However, due to the
default the Partnership did not receive any participation income from this PIM.
During May 1999, the Partnership paid a special distribution of $1.08 per
Limited Partner interest from the principal proceeds received from the Remington
and Pope Building PIMs and the Shared Appreciation and prepayment premium
proceeds received from the Pope Building PIM.
During January 1999, the Partnership paid a special distribution of $.66 per
Limited Partner Interest from the principal proceeds and prepayment premium
received from the Cross Creek PIM in 1998. The prepayment of the Cross Creek PIM
remaining principal balance amounted to $9,414,586 with Additional Income (in
lieu of a prepayment premium) of approximately $318,000 was received along with
Shared Income of approximately $60,000.
The Partnership agreed to provide debt service relief in December of 2000 for
the Wildflower PIM due to the property's poor operating performance in the
competitive Las Vegas market. Occupancy had fallen as low as 80%, and the
property had been unable to generate sufficient revenues to adequately maintain
the property. Consequently, a loan modification agreement between the
Partnership, the borrower entity under the PIM, the principals of the borrower
entity and the affiliated property management agent will provide operating funds
for property repairs. Under the modification, the principals of the borrower
entity converted $105,000 of cash advances to a long-term non-interest-bearing
loan. In addition, an escrow account to be used exclusively for property repairs
was established and is under the control of the Partnership. The management
agent made an initial deposit into the escrow equal to 30% of the management
fees it received during 2000 and will continue to deposit a similar amount until
December 2002. The Partnership made an initial deposit into the escrow account
to match the $105,000 principals' loan and the management agent's initial
deposit and will continue to match additional deposits until December 2002. The
Partnership's contributions to the escrow account will be considered an interest
rebate. The principals' loan and the escrow deposits made by the management
agent and the Partnership can be repaid exclusively out of any Surplus Cash, as
defined by HUD, that the property may generate in future years. Any repayments
will be made on a pro rata basis among the parties. The effective interest rate
after the interest rebate was to a level that was at the then prevailing rate
for similar instruments.
The Partnership's other remaining PIM investment is backed by the underlying
first mortgage loan on Creekside. Presently, the General Partners do not expect
Creekside to pay the Partnership any participation interest or to be sold or
refinanced during 2002. However, if favorable market conditions provide the
borrower an opportunity to sell the property, there are no
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contractual obligations remaining that would prevent a prepayment of the
underlying first mortgage. Creekside, located in the Portland, Oregon area,
continues to operate successfully with occupancy in the mid-90% range. However,
Clackamas County is undertaking an extensive road improvement project adjacent
to Creekside, and a portion of the property may be taken during the road's
construction. The Partnership does not expect any major changes to the property
during 2002, but eventually, property operations could be affected by the road
project.
The Partnership has the option to call these PIMs by accelerating their
maturity. If the call feature is exercised for both the participation feature
and the insured mortgage or MBS portion of the PIMs then the insurance feature
of the loan would be canceled. Therefore, the Partnership will determine the
merits of exercising the call option for each PIM as economic conditions
warrant. Such factors as the condition of the asset, local market conditions,
the interest rate environment and availability of financing will affect those
decisions.
CRITICAL ACCOUNTING POLICY
The Partnership's critical accounting policy relates primarily to revenue
recognition related to the participation feature of the Partnership's PIM
investments. The Partnership's policy is as follows:
Basic interest on PIMs is recognized based on the stated rate of the FHA
mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA
MBS. The Partnership recognizes interest related to the participation
features when the amount becomes fixed and the transaction that gives rise to
such amount is finalized, cash is received and all contingencies are
resolved. This could be the sale or refinancing of the underlying real
estate, which results in a cash payment to the Partnership or a cash payment
made to the Partnership from surplus cash relative to the participation
feature.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSESSMENT OF CREDIT RISK
The Partnership's investments in its insured mortgage and MBS portion of its
PIMs and its MBS are guaranteed and/or insured by GNMA, Fannie Mae, FHLMC or HUD
and therefore the certainty of their cash flows and the risk of material loss of
the amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs. These
obligations are not guaranteed by the U.S. Government or the Federal Home Loan
Bank Board. However, Fannie Mae and FHLMC are two of the largest corporations in
the United States with significant experience in mortgage securitizations. In
addition, their MBS instruments carry the highest credit rating given to
financial instruments. GNMA guarantees the full and timely payment of principal
and basic interest on the securities it issues, which represent interests in
pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the
U.S. Government, are backed by the full faith and credit of the U.S. Government.
The Partnership includes in cash and cash equivalents approximately $3.4 million
of commercial paper, which is issued by entities with a credit rating equal to
one of the top two rating categories of a nationally recognized statistical
rating organization.
INTEREST RATE RISK
The Partnership's primary market risk exposure is to interest rate risk, which
can be defined as the exposure of the Partnership's net income, comprehensive
income or financial condition to adverse movements in interest rates. At
December 31, 2001, the Partnerships PIMs and MBS comprise the majority of the
Partnership's assets. Decreases in interest rates may accelerate the prepayment
of the Partnership's investments. The Partnership does not utilize any
derivatives or other instruments to manage this risk as the Partnership plans to
hold its PIM investments to expected maturity, while it is expected that
substantially all of the MBS will prepay over the same time period, thereby
mitigating any potential interest rate risk to the disposition value of any
remaining MBS.
The Partnership monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Partnership, when setting regular distribution
policy. For MBS, the Partnership forecasts prepayments based on trends in
similar securities as reported by statistical reporting entities such as
Bloomberg. For PIMs, the Partnership incorporates prepayment assumptions into
planning as individual properties notify the Partnership of the intent to prepay
or as they are
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scheduled to mature.
The table below provides information about the Partnership's financial
instruments that are sensitive to changes in interest rates. For mortgage
investments, the table presents principal cash flows and related weighted
average interest rates ("WAIR") by expected maturity dates. The expected
maturity date is contractual maturity adjusted for expectations of prepayments.
<Table>
<Caption>
Expected maturity dates ($ in thousands)
---------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total Fair
Face Value(1)
Value
-------------------------------------------------------------------------------------------------------
Interest-sensitive
assets:
MBS $ 917 $ 817 $ 734 $ 666 $ 611 $ 10,111 $ 13,856 $ 14,308
WAIR 7.63% 7.63% 7.63% 7.63% 7.63% 7.63% 7.63%
PIMs 309 335 363 393 426 21,898 23,724 24,767
WAIR 7.94% 7.94% 7.94% 7.94% 7.94% 7.94% 7.94%
-------- -------- -------- -------- ------- ------------ ------------ ----------
Total Interest-
sensitive assets $ 1,226 $ 1,152 $ 1,097 $ 1,059 $ 1,037 $ 32,009 $ 37,580 $ 39,075
======== ======== ======== ======== ======= ============ ============ ==========
</Table>
(1) The methodology used by the Partnership to estimate the fair value of each
class of financial instrument is described in Note H to the Partnership's
financial statements presented in Appendix A to this report. As described
in that note, the Partnership does not include an estimate of value for the
participation interest associated with its PIM investments.
RESULTS OF OPERATIONS
The following discussion relates to the operation of the Partnership during the
years ended December 31, 2001, 2000 and 1999.
<Table>
<Caption>
(Amounts in thousands)
2001 2000 1999
--------- ---------- ---------
Interest income on PIMs:
Basic interest $ 2,069 $ 2,773 $ 6,325
Participation interest 19 941 1,666
Interest income on MBS 902 550 1,206
Other interest income 130 427 609
Partnership expenses (536) (674) (1,006)
Amortization of prepaid fees and
expenses (73) (138) (1,298)
--------- ---------- ---------
Net income $ 2,511 $ 3,879 $ 7,502
========= ========== =========
</Table>
Net income decreased in 2001 when compared to 2000 primarily due to lower basic
interest and participation interest on PIMs and other interest income. This was
partially offset by an increase in MBS interest income. Basic interest on PIMs
decreased primarily due to the payoffs of the Enclave, Bell Station and
Brookside PIMs in 2000 and the reclassification of the Richmond Park PIM to a
MBS in May 2001. Participation interest was higher during 2000 due to amounts
collected in connection with the PIM payoffs received. Other interest income
decreased due to significantly lower average interest rates earned on cash
balances available for short-term investing in 2001 versus 2000. MBS interest
income increased due to the
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Richmond Park reclassification.
Net income decreased in 2000 as compared to 1999 primarily due to lower interest
income on PIMs and MBS. Basic interest on PIMs decreased due to the payoffs of
the Enclave, Bell Station and Brookside PIMs in 2000 and the Salishan, Saratoga,
Marina Shores and Valley Shores PIMs in 1999. Participation interest decreased
due to the PIM payoffs mentioned above. MBS interest income decreased due
primarily to the payoff of the Patrician MBS in 1999. Expenses decreased in 2000
compared with 1999 due primarily to lower asset management fees and amortization
expenses. The decrease in asset management fees is a result of the Partnership's
asset base declining. Amortization expense was greater in 1999 as compared to
2000 as a result of the full amortization of the remaining prepaid fees and
expenses on the 1999 PIM prepayments being greater than the 2000 PIM
prepayments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. Information as to the
directors and executive officers of Krupp Plus Corporation which is a General
Partner of the Partnership and is the general partner of Mortgage Services
Partners Limited Partnership which is the other General Partner of the
Partnership, is as follows:
<Table>
<Caption>
Position With
Name and Age Krupp Plus Corporation
------------ ----------------------
Douglas Krupp (55) President, Co-Chairman of the Board and Director
George Krupp (57) Co-Chairman of the Board and Director
Peter F. Donovan (48) Senior Vice President
Ronald Halpern (60) Senior Vice President
Robert A. Barrows (44) Vice President and Treasurer
Carol J.C. Mills (52) Vice President
</Table>
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer
of The Berkshire Group, an integrated real estate financial services firm
engaged in real estate acquisitions, property management, investment
sponsorship, venture capital investing, mortgage banking and financial
management, and ownership of two operating companies through private equity
investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire
Group was established as The Krupp Companies in 1969 and he has served as the
Chief Executive Officer since 1992. He is a graduate of Bryant College where he
received an honorary Doctor of Science in Business Administration in 1989.
George Krupp is the Co-Founder and Co-Chairman of The Berkshire Group, an
integrated real estate financial services firm engaged in real estate
acquisitions, property management, investment sponsorship, venture capital
investing, mortgage banking and financial management, and ownership of two
operating companies through private equity investments. Mr. Krupp has held the
position of Co-Chairman since The Berkshire Group was established as The Krupp
Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish
High School in Waltham, Massachusetts since September of 1997. Mr. Krupp
attended the University of Pennsylvania and Harvard University and holds a
Master's Degree in History from Brown University. Douglas and George Krupp are
brothers.
Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance which
position he has held since January of 1998 and in this capacity, he oversees the
strategic growth plans of this mortgage banking firm. Berkshire Mortgage Finance
is the 10th largest commercial mortgage servicer in the United States with a
servicing and asset management portfolio of $14.1 billion. Previously he served
as President of Berkshire Mortgage Finance from January of 1993 to January of
1998 and in that capacity he directed the production, underwriting, servicing
and asset management activities of the firm. Prior to that,
-9-
<Page>
he was Senior Vice President of Berkshire Mortgage Finance and was responsible
for all participating mortgage originations. Before joining the firm in 1984, he
was Second Vice President, Real Estate Finance for Continental Illinois National
Bank & Trust, where he managed a $300 million construction loan portfolio of
commercial properties. Mr. Donovan received a B.A. from Trinity College and an
M.B.A. degree from Northwestern University. Mr. Donovan is currently a member of
the Advisory Council for Fannie Mae.
Ronald Halpern is President and COO of Berkshire Mortgage Finance. He has served
in these positions since January of 1998 and in this capacity, he is responsible
for the overall operations of the Company. Prior to January of 1998, he was
Executive Vice President, managing the underwriting, closing, portfolio
management and servicing departments for Berkshire Mortgage Finance. Before
joining the firm in 1987, he held senior management positions with the
Department of Housing and Urban Development in Washington D.C. and several HUD
regional offices. Mr. Halpern has over 30 years of experience in real estate
finance which includes his experience as prior Chairman of the MBA Multifamily
Housing Committee. He holds a B.A. degree from the University of the City of New
York and J.D. degree from Brooklyn Law School.
Robert A. Barrows is Senior Vice President and Chief Financial Officer of
Berkshire Mortgage Finance. Mr. Barrows has held several positions within The
Berkshire Group since joining the company in 1983 and is currently responsible
for accounting, financial reporting and treasury functions for Berkshire
Mortgage Finance. Prior to joining The Berkshire Group, he was an audit
supervisor for Coopers & Lybrand L.L.P. in Boston. He received a B.S. degree
from Boston College and is a Certified Public Accountant.
Carol J.C. Mills is Senior Vice President for Loan Management of Berkshire
Mortgage Finance and in this capacity, she is responsible for the Loan Servicing
and Asset Management functions of Berkshire Mortgage Finance. She manages the
estimated $14.1 billion portfolio of loans. Ms. Mills joined Berkshire in
December 1997 as Vice President and was promoted to Senior Vice President in
January 1999. From January 1989 through November 1997, Ms. Mills was Vice
President of First Winthrop Corporation and Winthrop Financial Associates, in
Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a
Master of Architecture degree from Harvard University. Ms. Mills is a member of
the Real Estate Finance Association, New England Women in Real Estate, the
Mortgage Bankers Association and the Servicing Advisory Council for Freddie Mac.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2001, no person of record owned or was known by the General
Partners to own beneficially more than 5% of the Partnership's 14,956,796
outstanding Limited Partner interests. The only interests held by management or
its affiliates consist of the 2.5% general partner interest held by Krupp Plus
Corporation, the 97.5% general partner interest held by Mortgage Services
Partners Limited Partnership and the 100 Limited Partner interests (0.0007% of
the total outstanding) held by Krupp Depositary Corporation, an affiliate of the
General Partners.
Profits from Partnership operations and Distributable Cash Flow are allocated
97% to the Unitholders and Corporate Limited Partner (the "Limited Partners")
and 3% to the General Partners.
Upon the occurrence of a capital transaction, as defined in the Partnership
Agreement, net cash proceeds and profits from the capital transaction will be
distributed first, to the Limited Partners until they have received a return of
their total invested capital, second, to the General Partners until they have
received a return of their total invested capital, third, 99% to the Limited
Partners and 1% to the General Partners until the Limited Partners receive an
amount equal to any deficiency in the 11% cumulative return on their invested
capital that exists through fiscal years prior to the date of the capital
transaction, fourth, to the class of General Partners until they have received
an amount equal to 4% of all amounts of cash distributed under all capital
transactions and fifth, 96% to the Limited Partners and 4% to the General
Partners. Losses from a capital transaction will be allocated 97% to the Limited
Partners and 3% to the General Partners.
Upon the occurrence of a terminating capital transaction, as defined in the
Partnership Agreement, the net cash proceeds and winding up of the affairs of
the Partnership will be allocated among the Partners first, to each class of
Partners in the amount equal to, or if less than, in proportion to, the positive
balance in the Partner's capital accounts, second, to the Limited Partners until
they have received a return of their total invested capital, third, to the
General Partners until they have received a return of their total invested
capital, fourth, 99% to the Limited Partners and 1% to the General Partners
until the Limited
-10-
<Page>
Partners have received to any deficiency in the 11% cumulative return on their
invested capital that exists through fiscal years prior to the date of the
capital transaction, fifth, to the General Partners until they have received an
amount equal to 4% of all amounts of cash distributed under all capital
transactions and sixth, 96% to the Limited Partners and 4% to the General
Partners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of the Partnership Agreement, the General Partners or their
affiliates receive an Asset Management Fee equal to .75% per annum of the value
of the Partnership's invested assets payable quarterly. The General Partners may
also receive an incentive management fee in an amount equal to .3% per annum on
the Partnership's Total Invested Assets providing the Unitholders receive a
specified non-cumulative annual return on their Invested Capital. Total fees
payable to the General Partners as asset management or incentive management fees
shall not exceed 9.05% of distributable cash flow over the life of the
Partnership. During 2001, Mortgage Services Partners Limited Partnership, a
General Partner, received $231,416 related to the Asset Management Fee.
Additionally, the Partnership reimburses affiliates of the General Partners for
certain expenses incurred in connection with maintaining the books and records
of the Partnership, the preparation and mailing of financial reports, tax
information, other communications to investors and legal fees and expenses.
During 2001, The Berkshire Companies Limited Partnership and Berkshire Mortgage
Finance Limited Partnership, affiliates of the General Partners, received a
total of $118,398 in reimbursements.
During 2001, the General Partners received distributions totaling $78,831
related to their 3% share of Distributable Cash Flow.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and Schedule
included under Item 8, Appendix A, on page F-2 of this report.
2. Financial Statement Schedule - see Index to Financial Statements and
Schedule included under Item 8, Appendix A, on page F-2 of this
report. All other schedules are omitted as they are not applicable,
not required or the information is provided in the Financial
Statements or the Notes thereto.
(b) REPORTS ON FORM 8-K
During the last quarter of the year ended December 31, 2001, the
Partnership did not file any reports on Form 8-K.
(c) Exhibits:
NUMBER AND DESCRIPTION
UNDER REGULATION S-K
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS INCLUDING
INDENTURES:
(4.1) Agreement of Limited Partnership dated as of July 19, 1988
[Exhibit A included in Amendment No. 1 of Registrant's
Registration Statement on Form S-11 dated July 20, 1988
(File No. 33-21201)].*
(4.2) Subscription Agreement whereby a subscriber agrees to
purchase Units and adopts the provisions of the Agreement of
Limited Partnership [Exhibit D included in Amendment No. 1
of Registrant's Registration Statement on Form S-11 dated
July 20, 1988 (File No. 33-21201)].*
(4.3) Copy of First Amended and Restated Certificate of Limited
Partnership filed with the Massachusetts Secretary of State
on July 1, 1988. [Exhibit 4.4 to Amendment No. 1 of
Registrant's Registration
-11-
<Page>
Statement on Form S-11 dated July 20, 1988 (File No.
33-21201)].*
(10) MATERIAL CONTRACTS:
(10.1) Form of agreement between the Partnership and Krupp Mortgage
Corporation [Exhibit 10.2 to Registrant's Registration
Statement on Form S-11 dated April 20, 1988 (File No.
33-21201)].*
RICHMOND PARK APARTMENTS
(10.2) Prospectus for GNMA Pool No. 260865 (PL) [Exhibit 1 to
Registrant's report on Form 8-K dated August 30, 1989 (File
No. 0-17690)].*
WILDFLOWER APARTMENTS
(10.3) Prospectus for GNMA Pool No. 280652(PL) [Exhibit 10.30 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 0-17690)].*
(10.4) Subordinated Multifamily Deed of Trust dated December 12,
1989 (including Subordinated Promissory Note) between
Lincoln Wildflower Limited Partnership and Krupp Insured
Mortgage Limited Partnership [Exhibit 10.31 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-17690)].*
(10.5) Loan Modification Agreement, dated December 21, 2000,
between Krupp Insured Mortgage Limited Partnership,
Berkshire Mortgage Finance Corporation (formally known as
Krupp Mortgage Corporation), Legacy Wildflower Limited
Partnership (formally known as Lincoln Wildflower Limited
Partnership), Legacy Partners 326 Limited Partnership
(formally known as Lincoln Property Company #326 Limited)
and Legacy Partners Residential, Inc.*
CREEKSIDE APARTMENTS
(10.6) Subordinated Promissory Note dated June 28, 1990 between
Creekside Associates Limited Partnership and Krupp Insured
Mortgage Limited Partnership [Exhibit 19.6 to Registrant's
report on Form 10-Q for the quarter ended June 30, 1990
(File No. 0-17690)].*
(10.7) Subordinated Multifamily Deed of Trust dated June 28, 1990
between Creekside Associates Limited Partnership and Krupp
Insured Mortgage Limited Partnership [Exhibit 19.7 to
Registrant's report on Form 10-Q for the quarter ended June
30, 1990 (File No. 0-17690)].*
(10.8) Participation Agreement dated June 28, 1990 between Krupp
Mortgage Corporation and Krupp Insured Mortgage Limited
Partnership [Exhibit 19.1 to Registrant's report on Form
10-Q for the quarter ended September 30, 1990 (File No.
0-17690)].*
(99) OTHER:
(99.1) Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.+
(99.2) Chief Accounting Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.+
* Incorporated by reference.
+ Filed herein
-12-
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 7th day
of January, 2003.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
By: Krupp Plus Corporation, a General
Partner
By: /s/ Douglas Krupp
-----------------------------
Douglas Krupp, President,
Co-Chairman (Principal Executive
Officer), and Director of
Krupp Plus Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 7th day of January, 2003.
SIGNATURES TITLE(s)
/s/ Douglas Krupp President, Co-Chairman (Principal Executive
- ----------------------- Officer), and Director of Krupp Plus Corporation,
Douglas Krupp a General Partner
/s/ George Krupp Co-Chairman (Principal Executive Officer)
- ----------------------- and Director of Krupp Plus Corporation, a
George Krupp General Partner
/s/ Peter F. Donovan Senior Vice President of Krupp Plus
- ----------------------- Corporation, a General Partner
Peter F. Donovan
/s/ Robert A. Barrows Vice President and Treasurer of Krupp Plus
- ----------------------- Corporation, a General Partner
Robert A. Barrows
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<Page>
CERTIFICATIONS
I, Douglas Krupp, certify that:
1. I have reviewed this annual report on Form 10-K/A of Krupp
Insured Mortgage Limited Partnership;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
Date: January 7, 2003
/s/ Douglas Krupp
---------------------------
Douglas Krupp
Principal Executive Officer
-14-
<Page>
CERTIFICATIONS
I, Robert A. Barrows, certify that:
4. I have reviewed this annual report on Form 10-K/A of Krupp
Insured Mortgage Limited Partnership;
5. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
6. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
Date: January 7, 2003
/s/ Robert A. Barrows
--------------------------
Robert A. Barrows
Chief Accounting Officer
-15-
<Page>
APPENDIX A
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
--------------------
FINANCIAL STATEMENTS AND SCHEDULE
ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 2001
F-1
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
--------------------
<Table>
Report of Independent Accountants F-3
Balance Sheets at December 31, 2001 and 2000 F-4
Statements of Income and Comprehensive Income for the Years Ended December 31, 2001,
2000 and 1999 F-5
Statements of Changes in Partners' Equity for the Years Ended
December 31, 2001, 2000 and 1999 F-6
Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999 F-7
Notes to Financial Statements F-8 - F-17
</Table>
All schedules are omitted as they are not applicable or not required, or the
information is provided in the financial statements or the notes thereto.
F-2
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------
To the Partners of
Krupp Insured Mortgage Limited Partnership:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Krupp
Insured Mortgage Limited Partnership (the "Partnership") at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 22, 2002
F-3
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 2001 and 2000
--------------------
<Table>
<Caption>
2001 2000
------------- -------------
ASSETS
Participating Insured Mortgages ("PIMs")
(Notes B, C and H) $ 23,723,593 $ 33,004,074
Mortgage-Backed Securities ("MBS")
(Notes B, D and H) 14,308,403 6,640,398
------------- -------------
Total mortgage investments 38,031,996 39,644,472
Cash and cash equivalents (Notes B, C and H) 3,603,846 2,737,740
Interest receivable and other assets 267,672 292,370
Prepaid acquisition fees and expenses, net of
accumulated amortization of $596,986 and
$544,434 respectively (Note B) 30,656 83,208
Prepaid participation servicing fees, net of
accumulated amortization of $195,430 and
$174,676, respectively (Note B) 12,106 32,860
------------- -------------
Total assets $ 41,946,276 $ 42,790,650
============= =============
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 17,875 $ 17,650
------------- -------------
Partners' equity (deficit) (Notes A and E):
Limited Partners
(14,956,796 Limited Partner interests
outstanding) 41,833,148 42,986,643
General Partners (377,115) (373,628)
Accumulated Comprehensive Income (Note B) 472,368 159,985
------------- -------------
Total Partners' equity 41,928,401 42,773,000
------------- -------------
Total liabilities and Partners' equity $ 41,946,276 $ 42,790,650
============= =============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-4
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999
--------------------
<Table>
<Caption>
2001 2000 1999
------------- ------------- -------------
Revenues (Note B):
Interest income - PIMs (Note C):
Basic interest $ 2,068,652 $ 2,772,996 $ 6,324,994
Participation interest 19,231 941,003 1,665,793
Interest income - MBS (Note D) 902,292 549,802 1,205,925
Other interest income 130,485 427,056 609,360
------------- ------------- -------------
Total revenues 3,120,660 4,690,857 9,806,072
------------- ------------- -------------
Expenses:
Asset management fee to an affiliate (Note F) 231,416 318,118 703,699
Expense reimbursements to affiliates (Note F) 118,398 125,247 92,642
Amortization of prepaid fees and expenses (Note B) 73,306 138,050 1,298,012
General and administrative 186,059 230,294 209,402
------------- ------------- -------------
Total expenses 609,179 811,709 2,303,755
------------- ------------- -------------
Net income (Note G) 2,511,481 3,879,148 7,502,317
Other comprehensive income:
Net change in unrealized gain on MBS 312,383 156,410 (641,612)
------------- -------------- -------------
Total comprehensive income $ 2,823,864 $ 4,035,558 $ 6,860,705
============= ============== =============
Allocation of net income (Note E):
Limited Partners $ 2,436,137 $ 3,762,774 $ 7,277,247
============= ============= =============
Average net income per Limited Partner
interest (14,956,796 Limited Partner interests outstanding) $ .16 $ .25 $ .49
============= ============= =============
General Partners $ 75,344 $ 116,374 $ 225,070
============= ============= =============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-5
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
--------------------
<Table>
<Caption>
Accumulated Total
Limited General Comprehensive Partners'
Partners Partners Income Equity
------------- ------------- ------------- -------------
Balance at December 31, 1998 $ 134,849,373 $ (312,060) $ 645,187 $ 135,182,500
Net income 7,277,247 225,070 - 7,502,317
Quarterly distributions (12,563,709) (260,692) - (12,824,401)
Special distributions (30,511,863) - - (30,511,863)
Change in unrealized
gain on MBS - - (641,612) (641,612)
------------- ------------- ------------- -------------
Balance at December 31, 1999 99,051,048 (347,682) 3,575 98,706,941
Net income 3,762,774 116,374 - 3,879,148
Quarterly distributions (5,833,146) (142,320) - (5,975,466)
Special distributions (53,994,033) - - (53,994,033)
Change in unrealized
gain on MBS - - 156,410 156,410
------------- ------------- ------------- -------------
Balance at December 31, 2000 42,986,643 (373,628) 159,985 42,773,000
Net income 2,436,137 75,344 - 2,511,481
Quarterly distributions (3,589,632) (78,831) - (3,668,463)
Change in unrealized
gain on MBS - - 312,383 312,383
------------- ------------- ------------- -------------
Balance at December 31, 2001 $ 41,833,148 $ (377,115) $ 472,368 $ 41,928,401
============= ============= ============= =============
</Table>
The accompanying notes are an integral
part of the financial statements.
F-6
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
--------------------
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Operating activities:
Net income $ 2,511,481 $ 3,879,148 $ 7,502,317
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of prepaid fees and expenses 73,306 138,050 1,298,012
Shared Appreciation Interest and prepayment
premium income - (499,093) (1,027,201)
Changes in assets and liabilities:
Decrease (increase) in interest receivable
and other assets 24,698 (105,007) 598,802
Increase (decrease) in liabilities 225 (1,900) (11,244)
------------ ------------ ------------
Net cash provided by operating activities 2,609,710 3,411,198 8,360,686
------------ ------------ ------------
Investing activities:
Principal collections on PIMs including
Shared Appreciation Interest and prepayment premiums
of $499,093 in 2000, and $1,027,201 in 1999 330,141 18,885,111 48,587,772
Principal collections on MBS 1,594,718 976,124 10,705,146
------------ ------------ ------------
Net cash provided by investing activities 1,924,859 19,861,235 59,292,918
------------ ------------ ------------
Financing activities:
Quarterly distributions (3,668,463) (5,975,466) (12,824,401)
Special distributions - (53,994,033) (30,511,863)
------------ ------------ ------------
Net cash used for financing activities (3,668,463) (59,969,499) (43,336,264)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 866,106 (36,697,066) 24,317,340
Cash and cash equivalents, beginning of year 2,737,740 39,434,806 15,117,466
------------ ------------ ------------
Cash and cash equivalents, end of year $ 3,603,846 $ 2,737,740 $ 39,434,806
============ ============ ============
Supplemental disclosure of non-cash investing activities:
Reclassification of investment in a PIM to a MBS $ 8,950,340 $ - $ -
============ ============ ============
Non cash activities:
Increase (decrease) in fair value of MBS $ 312,383 $ 156,410 $ (641,612)
============ ============ ============
</Table>
The accompanying notes are an integral part
of the financial statements.
F-7
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
--------------------
A. ORGANIZATION
Krupp Insured Mortgage Limited Partnership (the "Partnership") was formed
on March 21, 1988 by filing a Certificate of Limited Partnership in The
Commonwealth of Massachusetts. The Partnership was organized for the
purpose of investing in multi-family loans and mortgage backed securities.
The Partnership issued all of the General Partner Interests to two General
Partners in exchange for capital contributions aggregating $3,000. Krupp
Plus Corporation and Mortgage Services Partners Limited Partnership are the
General Partners of the Partnership and Krupp Depositary Corporation is the
Corporate Limited Partner. Except under certain limited circumstances upon
termination of the Partnership, the General Partners are not required to
make any additional capital contributions. The Partnership terminates on
December 31, 2028, unless terminated earlier upon the occurrence of certain
events as set forth in the Partnership Agreement.
The Partnership commenced the public offering of Limited Partner interests
on July 22, 1988 and completed its public offering on May 23, 1990 having
sold 14,956,696 Limited Partner interests for $298,678,321 net of purchase
volume discounts of $457,599. In addition, Krupp Depositary Corporation
owns one hundred Limited Partner interests.
B. SIGNIFICANT ACCOUNTING POLICIES
The Partnership uses the following accounting policies for financial
reporting purposes, which may differ in certain respects from those used
for federal income tax purposes (Note G).
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP").
MBS
The Partnership, in accordance with Financial Accounting Standards
Board's Statement 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"), classifies its MBS portfolio as
available-for-sale. The Partnership classifies its MBS portfolio as
available-for-sale as the Partnership expects that a portion of the MBS
portfolio will remain after all the PIMs pay off and that it will be
necessary to then sell the remaining MBS portfolio at that time in order
to close out the Partnership. In addition, other situations such as
liquidity needs could arise which would necessitate the sale of a
portion of the MBS portfolio. As such the Partnership carries its MBS at
fair market value and reflects any unrealized gains (losses) as a
separate component of Partners' Equity. The Partnership amortizes
purchase premiums or discounts over the life of the underlying mortgages
using the effective interest method.
PIMs
The Partnership accounts for its MBS portion of a PIM investment in
accordance with FAS 115, under the classification of held to maturity as
this investment has a participation feature. As a result, the
Partnership would not sell or otherwise dispose of the MBS. Accordingly,
the Partnership has both the intention and ability to hold this
investment to expected maturity. The Partnership carries this MBS at
amortized cost.
The Partnership holds insured mortgage portion of its Federal Housing
Administration (FHA) PIM at amortized cost and does not establish loan
loss reserves as this investment is fully insured by the FHA.
Basic interest on PIMs is recognized based on the stated rate of the FHA
mortgage loan (less the servicer's fee) or the stated coupon rate of the
Government National Mortgage Association ("GNMA") MBS. The Partnership
recognizes interest related to the participation features when the
amount becomes fixed and the transaction that gives rise to such amount
is finalized, cash is received and all contingencies are resolved. This
could be the sale or refinancing of the underlying real estate, which
results in a cash payment to the Partnership or a cash payment made to
the Partnership from surplus cash relative to the participation feature.
Continued
F-8
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
B. SIGNIFICANT ACCOUNTING POLICIES, continued
CASH AND CASH EQUIVALENTS
The Partnership includes all short-term investments with maturities of
three months or less from the date of acquisition in cash and cash
equivalents. The Partnership invests its cash primarily in commercial paper
and money market funds with a commercial bank and has not experienced any
loss to date on its invested cash.
PREPAID FEES AND EXPENSES
Prepaid fees and expenses represent prepaid acquisition fees and expenses
and prepaid participation servicing fees paid for the acquisition and
servicing of PIMs. The Partnership amortizes prepaid acquisition fees and
expenses using a method that approximates the effective interest method
over a period of ten to twelve years, which represents the estimated life
of the underlying mortgage. Acquisition expenses incurred on potential
acquisitions which were not consummated were charged to operations.
The Partnership amortizes prepaid participation servicing fees using a
method that approximates the effective interest method over a ten-year
period beginning at final endorsement of the loan if a Department of
Housing and Urban Development ("HUD") loan or GNMA loan.
Upon the repayment of a PIM, any unamortized acquisition fees and expenses
and unamortized participation servicing fees related to such loan are
expensed.
INCOME TAXES
The Partnership is not liable for federal or state income taxes as
Partnership income is allocated to the partners for income tax purposes. In
the event that the Partnership's tax returns are examined by the Internal
Revenue Service or state taxing authority and the examination results in a
change in Partnership taxable income, such change will be reported to the
partners.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities, contingent assets and liabilities and
revenues and expenses during the period. Actual results could differ from
those estimates.
C. PIMs
At December 31, 2001 and 2000, the Partnership had investments in two and
three PIMs, respectively. The Partnership's PIMs consist of (a) a GNMA MBS
representing the securitized first mortgage loan on the underlying property
or a sole participation interest in the mortgage loan originated under
HUD's FHA lending program (collectively the "insured mortgages"), and (b)
participation interests in the revenue stream and appreciation of the
underlying property above specified base levels. The borrower conveys these
participation features to the Partnership generally through a subordinated
promissory note and mortgage (the "Agreement").
Continued
F-9
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
C. PIMs, continued
The Partnership receives guaranteed monthly payments of principal and
interest on the GNMA MBS, and HUD insures the FHA mortgage loan. The
borrower usually cannot prepay the first mortgage loan during the first
five years and may prepay the first mortgage loan thereafter subject to a
9% prepayment premium in years six through nine, a 1% prepayment premium in
year ten and no prepayment premium thereafter. The Partnership may receive
interest related to its participation interests in the underlying property,
however, these amounts are neither insured nor guaranteed.
Generally, the participation features consist of the following: (i)
"Minimum Additional Interest" which is at the rate of .5% to 1% per annum
calculated on the unpaid principal balance of the first mortgage on the
underlying property, (ii) "Shared Income Interest" which is 25% to 35% of
the monthly gross rental income generated by the underlying property in
excess of a specified base, but only to the extent that it exceeds the
amount of Minimum Additional Interest earned during such month and (iii)
"Shared Appreciation Interest" which is 25% to 35% of any increase in the
value of the underlying property in excess of a specified base. Payment of
participation interest from the operations of the property is limited in
any year to 50% of net revenue or Surplus Cash as defined by Fannie Mae or
HUD, respectively. The aggregate amount of Minimum Additional Interest,
Shared Income Interest and Shared Appreciation Interest payable by the
underlying borrower on the maturity date generally cannot exceed 50% of any
increase in value of the property above certain thresholds.
Shared Appreciation Interest is payable when one of the following occurs:
(1) the sale of the underlying property to an unrelated third party on a
date which is later than five years from the date of the Agreement, (2) the
maturity date or accelerated maturity date of the Agreement, or (3)
prepayment of amounts due under the Agreement and the insured mortgage.
The Partnership, upon giving twelve months written notice, can accelerate
the maturity date of the Agreement to a date not earlier than ten years
from the date of the Agreement for (a) the payment of all participation
interest due under the Agreement as of the accelerated maturity date, or
(b) the payment of all participation interest due under the Agreement plus
all amounts due on the first mortgage note on the property.
During May 2001, the Partnership received $19,231 from the borrowers of the
Richmond Park PIM as a settlement to release the loan's participation
features. The property never generated sufficient cash flow to pay any
participation from property operations nor did it have sufficient value to
meet the threshold to pay any participation based on value if the property
was sold or refinanced. The borrowers asked for a release of the
participation features while keeping the insured first mortgage in place
until operations improve and the property can be sold or refinanced. The
General Partners agreed to this request in return for the settlement
because there was no expectation that the Partnership would be entitled to
any participation proceeds now or in the future in the property's current
condition. Upon this settlement, the insured first mortgage loan on
Richmond Park was reclassified from a PIM to a MBS as the only remaining
portion of the investment is a GNMA MBS. The Partnership also reclassified
this investment to available for sale concurrent with the release of the
participation feature. The Partnership will continue to receive the
scheduled principal and interest payments on the first mortgage until the
property is refinanced or sold.
Continued
F-10
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
C. PIMs, continued
On June 2, 2000, the Partnership paid a special distribution of $.93 per
Limited Partner interest from the proceeds of the Bell Station and Enclave
insured mortgage payoffs along with the Shared Appreciation Interest
proceeds from the Brookside PIM (see below), the Bell Station PIM and the
Enclave PIM.
On March 30, 2000, the Partnership received $190,239 of Shared Appreciation
Interest and $5,973 of Shared Income Interest from the Bell Station PIM.
During April and May, the Partnership received the principal proceeds of
$4,901,863 and $8,508,892 from the Bell Station and the Enclave PIM,
respectively. Subsequent to the payoff of the MBS portion of the Enclave
PIM, the Partnership received $178,854 of Shared Appreciation Interest and
$200,398 of Shared Income Interest.
On March 30, 2000, the Partnership paid a special distribution of $.31 per
Limited Partner interest from the principal proceeds in the amount of
$4,531,910, received from the Brookside Apartments PIM payoff in February
of 2000. Subsequent to the payoff of the MBS portion of the Brookside PIM,
the Partnership received $130,000 of Shared Appreciation Interest and
$176,513 of Shared Income Interest.
On January 11, 2000, the Partnership paid a special distribution of $2.37
per Limited Partner interest from the prepayment proceeds received during
December 1999 from the Salishan, Saratoga, and Marina Shores Apartments
PIMs and the Patrician MBS. In addition to the principal proceeds from the
Salishan PIM of $14,666,235, the Partnership received $146,662 of
prepayment premium income and $311,650 of Shared Income Interest and
Minimum Additional Interest. The Partnership also received $6,008,565 of
principal proceeds from the Marina Shores PIM along with $176,679 of Shared
Appreciation Interest and prepayment premium income. The principal proceeds
from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and
$7,830,263, respectively. The Partnership did not receive any participation
interest on the Saratoga prepayment.
During November 1999, the Partnership paid a special distribution of $.30
per Limited Partner interest from the principal proceeds received from the
Valley Manor PIM of $4,425,993. The Partnership did not receive any
participation income from this PIM prepayment.
During May 1999, the Partnership paid a special distribution of $1.08 per
Limited Partner interest from the principal proceeds, Shared Appreciation
and prepayment proceeds received from the Remington and Pope Building PIMs
(see below).
During March 1999, the Partnership received a payoff of the Remington PIM
in the amount of $12,199,298. The payoff was the result of a default on the
underlying loan which resulted in the Partnership receiving all of the
outstanding principal balance under the insurance feature of the PIM.
However, due to the default the Partnership did not receive any
participation income from this PIM.
During February 1999, the Partnership received a payoff of the Pope
Building PIM in the amount of $3,176,761. In addition, the Partnership
received $703,860 of Shared Appreciation Interest and prepayment premium
income and $218,578 of Shared Income Interest and Minimum Additional
Interest upon the payoff of the underlying mortgage.
During January 1999, the Partnership paid a special distribution of $.66
per Limited Partner interest from the principal proceeds and prepayment
premium received from the Cross Creek PIM during 1998. On November 16,
1998, the Partnership received a prepayment of the Cross Creek PIM in the
amount of $9,414,586. Additional interest in lieu of a prepayment penalty
of approximately $318,000 along with Shared Income Interest of
approximately $60,000 was also received during 1998.
Continued
F-11
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
C. PIMs, continued
At December 31, 2001 and 2000 there were no loans within the Partnership's
portfolio that were delinquent as to principal or interest.
The Partnership's PIMs consisted of the following at December 31, 2001 and
2000:
<Table>
<Caption>
Original Approximate Investment Basis at
Face Interest Maturity Monthly December 31,
PIMs Amount Rate(a) Date(f) Payment(g) 2001 2000
- ---- ------------ ---------- -------- ----------- ------------ ------------
GNMA
Richmond Park Apts.(h)
Richmond Heights, OH $ 10,000,000 - - $ - $ - $ 8,995,263
Wildflower Apts.
Las Vegas, NV 17,600,000 7.75%(b)(e)(i) 1/15/25 121,700 15,774,526 16,002,630
------------ ------------ ------------
27,600,000 15,774,526 24,997,893
------------ ------------ ------------
FHA
Creekside Apts.
Portland, OR 8,354,500 8.305%(b)(c)(d) 11/1/31 60,000 7,949,067 8,006,181
------------ ------------ ------------
Total $ 35,954,500 $ 23,723,593(j) $ 33,004,074
============ ============ ============
</Table>
(a) Represents the permanent interest rate of the GNMA MBS or the HUD-insured
first mortgage less the servicers fee. The Partnership may also receive
additional interest which consists of (i) Minimum Additional Interest based
on a percentage of the unpaid principal balance of the first mortgage on
the property, (ii) Shared Income Interest based on a percentage of monthly
gross income generated by the underlying property in excess of a specified
base amount (but only to the extent it exceeds the amount of Minimum
Additional Interest received during such month), (iii) Shared Appreciation
Interest based on a percentage of any increase in the value of the
underlying property in excess of a specified base value.
(b) Minimum additional interest is at a rate of .5% per annum calculated on the
unpaid principal balance of the first mortgage note.
(c) Shared income interest is based on 25% of monthly gross rental income over
a specified base amount.
(d) Shared appreciation interest is based on 25% of any increase in the value
of the project over the specified base value.
(e) Shared income interest is based on 35% of monthly gross rental income over
a specified base amount and shared appreciation interest is based on 35% of
any increase in the value of the project over the specified base value.
Continued
F-12
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
C. PIMs, continued
(f) The Partnership's GNMA MBS and HUD direct mortgages have call provisions,
which allow the Partnership to accelerate their respective maturity dates.
(g) The normal monthly payment consisting of principal and interest is payable
monthly at level amounts over the term of the GNMA MBS and the HUD direct
mortgage.
(h) During May 2001, the Partnership received $19,231 as a settlement to
release the loan's participation features. The insured first mortgage loan
was reclassified from a PIM to a MBS.
(i) The coupon rate of interest on the Wildflower Apartments PIM is 7.75% per
annum. However, in December 2000 the Partnership agreed to provide debt
service relief for the Wildflower PIM due to the property's poor operating
performance in the competitive Las Vegas market. Occupancy has fallen as
low as 80%, and the property has been unable to generate sufficient
revenues to adequately maintain the property. Consequently, a loan
modification agreement between the Partnership, the borrower entity under
the PIM, the principals of the borrower entity, and the affiliated property
management agent will provide operating funds for property repairs. Under
the modification, the principals of the borrower entity converted $105,000
of cash advances to a long-term non interest-bearing loan. In addition, an
escrow account to be used exclusively for property repairs has been
established and is under the control of the Partnership. The management
agent made an initial deposit into the escrow equal to 30% of the
management fees it received during 2000 and will continue to deposit a
similar amount until December 2002. The Partnership made an initial deposit
into the escrow to match the $105,000 principals' loan and the management
agent's initial deposit and will continue to match additional deposits
until December 2002. The Partnership's contributions to the escrow account
will be considered to be an interest rebate. The principals' loan and the
escrow deposits made by the management agent and the Partnership can be
repaid exclusively out of any Surplus Cash, as defined by HUD, that the
property may generate in future years. Any repayments will be made on a pro
rata basis amongst the parties. The approximate monthly payment is before
the rebate which fluctuates month to month.
(j) The aggregate cost of PIMs for federal income tax purposes is $23,723,593.
A reconciliation of the carrying value of PIMs for each of the three years
in the period ended December 31, 2001 is as follows:
<Table>
<Caption>
2001 2000 1999
-------------- ------------- --------------
Balance at beginning of period $ 33,004,074 $ 51,390,092 $ 98,950,663
Deductions during period:
Prepayments and
principal collections (330,141) (18,386,018) (47,560,571)
Reclass to MBS (8,950,340) - -
-------------- ------------- --------------
Balance at end of period $ 23,723,593 $ 33,004,074 $ 51,390,092
============== ============= ==============
</Table>
The underlying mortgages of the PIMs are collateralized by multi-family
apartment complexes located in 2 states. The apartment complexes range in
size from 172 to 540 units.
Continued
F-13
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
D. MBS
At December 31, 2001, the Partnership's MBS portfolio had an amortized cost
of $13,836,035 and gross unrealized gains of $472,368. At December 31,
2000, the Partnership's MBS portfolio had an amortized cost of $6,480,413
and gross unrealized gains and losses of $160,571 and $586 respectively.
The portfolio has maturity dates ranging from 2016 to 2024.
<Table>
<Caption>
Unrealized
Maturity Date Fair Value Gain/(loss)
------------- ------------- -------------
2002 - 2006 $ - $ -
2007 - 2011 - -
2012 - 2024 14,308,403 472,368
------------- -------------
Total $ 14,308,403 $ 472,368
============= =============
</Table>
E. PARTNERS' EQUITY
Profits from Partnership operations and Distributable Cash Flow are
allocated 97% to the Unitholders and Corporate Limited Partner (the
"Limited Partners") and 3% to the General Partners.
Upon the occurrence of a capital transaction, as defined in the Partnership
Agreement, net cash proceeds and profits from the capital transaction will
be distributed first, to the Limited Partners until they have received a
return of their total invested capital, second, to the General Partners
until they have received a return of their total invested capital, third,
99% to the Limited Partners and 1% to the General Partners until the
Limited Partners receive an amount equal to any deficiency in the 11%
cumulative return on their invested capital that exists through fiscal
years prior to the date of the capital transaction, fourth, to the class of
General Partners until they have received an amount equal to 4% of all
amounts of cash distributed under all capital transactions and fifth, 96%
to the Limited Partners and 4% to the General Partners. Losses from a
capital transaction will be allocated 97% to the Limited Partners and 3% to
the General Partners.
Upon the occurrence of a terminating capital transaction, as defined in the
Partnership Agreement, the net cash proceeds and winding up of the affairs
of the Partnership will be allocated among the Partners first, to each
class of Partners in the amount equal to, or if less than, in proportion
to, the positive balance in the Partner's capital accounts, second, to the
Limited Partners until they have received a return of their total invested
capital, third, to the General Partners until they have received a return
of their total invested capital, fourth, 99% to the Limited Partners and 1%
to the General Partners until the Limited Partners have received to any
deficiency in the 11% cumulative return on their invested capital that
exists through fiscal years prior to the date of the capital transaction,
fifth, to the General Partners until they have received an amount equal to
4% of all amounts of cash distributed under all capital transactions and
sixth, 96% to the Limited Partners and 4% to the General Partners.
Continued
F-14
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
E. PARTNERS' EQUITY, continued
During 2001, 2000 and 1999 the Partnership made quarterly distributions
totaling $.24, $.39 and $.84 per Limited Partner interest, respectively.
The Partnership made special distributions of $3.61 and $2.04 per Limited
interest in 2000 and 1999, respectively.
As of December 31, 2001, the following cumulative partner contributions and
allocations have been made since inception of the Partnership:
<Table>
<Caption>
Corporate Accumulated
Limited General Comprehensive
Unitholders Partner Partners Income Total
------------- ---------- ----------- ------------- --------------
Capital contributions $ 298,678,321 $ 2,000 $ 3,000 $ - $ 298,683,321
Syndication costs (20,431,915) - - - (20,431,915)
Quarterly distributions (224,056,957) (1,612) (4,929,066) - (228,987,635)
Special distributions (159,438,377) (1,066) - - (159,439,443)
Net income 147,081,731 1,023 4,548,951 - 151,631,705
Unrealized gains on MBS - - - 472,368 472,368
------------- ---------- ----------- ------------- --------------
Balance, December 31, 2001 $ 41,832,803 $ 345 $ (377,115) $ 472,368 $ 41,928,401
============= ========== =========== ============= ==============
</Table>
F. RELATED PARTY TRANSACTIONS
Under the terms of the Partnership Agreement, the General Partners or their
affiliates receive an Asset Management Fee equal to .75% per annum of the
value of the Partnership's invested assets payable quarterly. The General
Partners may also receive an incentive management fee in an amount equal to
.3% per annum on the Partnership's Total Invested Assets providing the
Unitholders receive a specified non-cumulative annual return on their
Invested Capital. Total fees payable to the General Partners as asset
management or incentive management fees shall not exceed 9.05% of
distributable cash flow over the life of the Partnership.
Additionally, the Partnership reimburses affiliates of the General Partners
for certain expenses incurred in connection with maintaining the books and
records of the Partnership, the preparation and mailing of financial
reports, tax information, other communications to investors and legal fees
and expenses.
Continued
F-15
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
G. FEDERAL INCOME TAXES
The reconciliation of the net income reported in the accompanying statement
of income with the income reported in the Partnership's 2001 federal income
tax return is as follows:
<Table>
Net income per statement of income $ 2,511,481
Less: Book to tax difference for amortization of prepaid fees and expenses (180,622)
------------
Net income for federal income tax purposes $ 2,330,859
============
</Table>
The allocation of the 2001 net income for federal income tax purposes is as
follows:
<Table>
<Caption>
Portfolio
Income
------------
Unitholders $ 2,260,918
Corporate Limited Partner 15
General Partners 69,926
------------
$ 2,330,859
============
</Table>
For the years ended December 31, 2001, 2000 and 1999 the average per unit
net income to the Unitholders for federal income tax purposes was $.15,
$.25 and $.36 respectively.
The basis of the Partnership's assets for financial reporting purposes was
less than its tax basis by approximately $1,698,000 and $2,191,000 at
December 31, 2001 and 2000, respectively. The basis of the Partnership's
liabilities for financial reporting purposes were the same as its tax basis
at December 31, 2001 and 2000, respectively.
H. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Partnership uses the following methods and assumptions to estimate the
fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short maturity of
those instruments.
MBS
The Partnership estimates the fair value of MBS based on quoted market
prices. Based on the estimated fair value determined using these methods
and assumptions, the Partnership's investments in MBS had gross unrealized
gains of approximately $472,000 at December 31, 2001, and gross unrealized
gains and losses of approximately $161,000 and $1,000 at December 31, 2000.
Continued
F-16
<Page>
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, continued
--------------------
H. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS, continued
PIMs
As there is no active trading market for these investments, Management
estimates the fair value of the PIMs using quoted market prices of MBS
having the same stated coupon rate. Management does not include any
participation income in the Partnership's estimated fair value arising from
appreciation of the properties, as Management does not believe it can
predict the time of realization of the feature with any certainty. Based on
the estimated fair value determined using these methods and assumptions,
the Partnership's investments in PIMs had gross unrealized gains of
approximately $1,043,000 at December 31, 2001, and gross unrealized gains
and losses of approximately $98,000 and $216,000 at December 31, 2000.
At December 31, 2001 and 2000, the estimated fair values of the
Partnership's financial instruments are as follows (amounts rounded to
nearest thousand):
<Table>
<Caption>
2001 2000
--------------------------- ------------------------
Fair Carrying Fair Carrying
Value Value Value Value
--------- --------- -------- ---------
Cash and cash equivalents $ 3,604 $ 3,604 $ 2,738 $ 2,738
MBS 14,308 14,308 6,640 6,640
PIMs 24,767 23,724 32,886 33,004
--------- --------- -------- ---------
$ 42,679 $ 41,636 $ 42,264 $ 42,382
========= ========= ======== =========
</Table>
F-17